Buying Solid Stocks in Small Bites For Best Results

by Richard Band | October 24, 2012 10:24 am

My, my! Only two or three weeks ago, the bulls were telling us to ignore weak earnings reports, forget about the fiscal cliff — because stock prices were supposedly headed for the moon, thanks to the Federal Reserve’s “unlimited” money-printing policy. To paraphrase a famous politician, how much has that story line done for you lately?

Now, of course, the same folks who were goading you to buy, buy, buy at the top are rushing to hedge their bets. But it’s a little late for that. The time to protect your stock positions was when the Dow stood 400 to 500 points higher, and good hedges (like Treasury bonds) were cheaper.

If we get another chance to buy iShares Barclays 20+ Year Treasury Bond Fund (NYSE:TLT[1]) you should definitely take advantage of it. Don’t chase the fund, though.

T-bonds won’t grow to the sky, any more than Chipotle Mexican Grill (NYSE:CMG[2]) did. (Chipotle, a former darling[3] of the “momentum” crowd, has plunged more than 40% over the past six months.) Investors who insist on paying top dollar are begging to get burned.

With the market’s long-term trend as shaky as it is right now, I wouldn’t hurry to empty my wallet. Instead, buy gradually, in small bites, as individual stocks (as well as mutual funds) drop into our recommended buying ranges. Remember, the lower your buy, the higher your projected return.

Start with rock-solid consumer franchises like Coca-Cola (NYSE:KO) and McDonald’s (NYSE:MCD[4]). Both of these members of our main model portfolio feature dividend yields far above what the Treasury is paying on 10-year paper, with solid prospects for inflation-beating “pay hikes” far into the future.

Once you’ve filled up on consumer stocks, move into blue chip technology issues like International Business Machines (NYSE:IBM[5]) and Intel (NASDAQ:INTC[6]). After bidding tech stocks way too high earlier this year, Wall Street has suddenly abandoned them.

To a long-term investor, neither extreme makes sense. Desktop computers and notebooks aren’t going to dominate the world, but neither are they about to vanish in a poof. We were selling into the spring euphoria; now we’re buying into the equally irrational autumn panic.

Note that INTC, with its delicious yield of more than 4%, will go ex-dividend November 5. That means you must buy the stock before that date to qualify for the upcoming dividend payment. We’re carrying INTC in our Incredible Dividend Machine.

A subscriber recently asked about the implied yield of Kinder Morgan Management (NYSE:KMR[7]). As I’ve noted before (most recently in our September issue), KMR pays quarterly distributions in additional shares of stock, rather than cash. The value of the shares distributed corresponds to the quarterly cash distribution of KMR’s twin, Kinder Morgan Energy Partners (NYSE:KMP[8]).

KMP just raised its cash distribution to $1.26 per unit. Thus, KMR’s implied yield, at today’s price, is approximately 6.6%. We’re tracking KMR as a Niche Investment outside the model portfolio.